Before Starting a Hedge Fund, Build Up Your Track Record

Earlier this month, Daniel Strachman, a financial expert who serves as the Director of Research and Strategy for the GAIM Conference Series, told StreetID that if hedge funds want to attract more capital, they need to tell a good story. “[Make] sure that they’re succinct in their message about what they’re doing with the capital they’re investing,” he said.

Hedge funds that are just starting out, however, have a lot more work ahead of them. Before they get started, they need to be prepared to show their accomplishments. “Honestly, I think no amount of advertising will really work,” said Andrei Knight, hedge fund expert, founder, and Senior Currency Strategist at fxKnight.com. “People are jaded and they want proof.”

Knight told StreetID that new fund managers would have two options. “You work for a few years at an established fund and build your reputation as a trader within that fund and go solo on your own,” he suggested. “Take some of your clients with you. Or you trade your own money — your uncle’s and your dad’s money — and you build up a track record.”

Despite the excessive amount of money that financial firms, particularly hedge funds, are forced to spend on licensing and regulation, Knight said that his clients have never asked him to show his license. “What they care about is the result,” he explained. “Show me your past six months’ trading history. Now, since the financial crisis, people are asking for two or three years’ worth. But that’s what they want — they want to see a consistent track record more than anything. So either you build that track record trading your friends’ and relatives’ money, or you build that track record working at a fund.”

With regard to the potential pitfalls and challenges, Knight acknowledges that some companies make their employees sign an agreement stating that they are not allowed to poach clients when they leave. “Obviously you have to be in legal compliance,” he said. “You have to know what agreement you signed. Some companies might actually encourage it, by the way, [because] they’re overloaded.”

Knight benefited from a similar situation when he was starting out. “The company that I was involved with didn’t want to be in currencies anymore,” said Knight. “It was perceived by their clients to be a risky asset class. They didn’t want to lose those clients — there were still clients that wanted to invest in currencies. But they didn’t want to actively manage those clients themselves.”

Thus, the company encouraged Knight to start his own firm and “manage those particular clients’ money.”

“We worked out an agreement where I pay them a commission of the profits I make from those clients,” said Knight. “So if you work it right, there are actually some benefits for the company, too. For them, it’s free money.”

It really depends on how you structure the deal, Knight added. “The important thing is to be open and honest with people and find a deal that works for both parties,” he said. “The thing you never want to do in business is bite the hand that feeds you or go behind somebody’s back.”

Knight also had some tips for established hedge funds that are looking to raise capital. “I would say, first and foremost, being good,” he said. “Simply being good. Knowing that the customer comes first, that keeping their money comes first, as opposed to gambling and taking outrageous risks.

“Right now there is so much money looking for good management out there. We have not had to do any advertising. It’s all word of mouth. We treat people right, we make steady profits for them, and they come to us, and they send their friends to us. It’s business number-one — treat your client well.”

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